Consumption is a bad, Income is a good
Tax debates are on the air waves again - most trying to figure out which income taxes to keep and which ones to cut. This is tactical policy making at its best - after all, most of the policy makers are focused on the next two years and the "real visionaries" perhaps, as long as four years. Policies made and implemented in two year slices, however, are not good.
Last few decades, economists and politicians alike, seem to have succeeded in imparting on the public a few incorrect notions. They point to the fact that almost 75% of the economy is driven by "consumption," and hence any policy that does not aid consumption is unlikely to be "growth oriented." This is a bit like saying if the gas gauge on your car is showing close to zero , you should really try to accelerate – use the last drop as fast as you can, so that you can reach the destination. Aiding consumption may help a few win elections in two years, but it is going to get the car stuck on the highway in between exits. There is no other way than finding another source for energy – jumping on the accelerator is not a solution – it is idiocy.
Taxes, by definition, are a distortion mechanism. The more complicated one makes it, the worse it is. And, taxing income is a lot worse than taxing consumption. These fundamental principles have been with us for over half a century – it is just that they do not help win elections in couple of years for some. Hence, it is unlikely we will enact good tax policies – creating a progressive tax regime on consumption – exempting basic food, clothing, health and shelter – and taxing everything else. Taxing consumption has to include societal costs – and not just an arbitrary measure created by bureaucrats. Consumption tax is a social necessity and income taxes are an inelegant and distorting substitute.
If economists, ever, are able to add value to society, it is by elevating these discussions in the context of societal utility and then explaining these to the masses so that something can be done.
Last few decades, economists and politicians alike, seem to have succeeded in imparting on the public a few incorrect notions. They point to the fact that almost 75% of the economy is driven by "consumption," and hence any policy that does not aid consumption is unlikely to be "growth oriented." This is a bit like saying if the gas gauge on your car is showing close to zero , you should really try to accelerate – use the last drop as fast as you can, so that you can reach the destination. Aiding consumption may help a few win elections in two years, but it is going to get the car stuck on the highway in between exits. There is no other way than finding another source for energy – jumping on the accelerator is not a solution – it is idiocy.
Taxes, by definition, are a distortion mechanism. The more complicated one makes it, the worse it is. And, taxing income is a lot worse than taxing consumption. These fundamental principles have been with us for over half a century – it is just that they do not help win elections in couple of years for some. Hence, it is unlikely we will enact good tax policies – creating a progressive tax regime on consumption – exempting basic food, clothing, health and shelter – and taxing everything else. Taxing consumption has to include societal costs – and not just an arbitrary measure created by bureaucrats. Consumption tax is a social necessity and income taxes are an inelegant and distorting substitute.
If economists, ever, are able to add value to society, it is by elevating these discussions in the context of societal utility and then explaining these to the masses so that something can be done.
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